Three Goals, One Paycheck
Marcus, 52, and Elena Ramos, 50, earn $185,000 and spend $118,000 a year. They save $18,000 into Marcus's 401(k) (a 4% match on his $120,000 salary) and $6,000 into a brokerage account. Balances: $640,000 in the 401(k), $90,000 in Roth IRAs, $70,000 in a taxable brokerage, and $60,000 in cash, which they call their emergency fund. The mortgage is $180,000 at 3.1% on a $520,000 house. They list three non-negotiable goals: retire at 62 on $70,000 a year after tax; pay $25,000 a year for four years for each child, ages 14 and 11; and buy a $250,000 lake house for cash in eight years. Marcus carries $400,000 of term life insurance and neither has long-term care coverage. Elena says: 'Just make the numbers work.'
1. Build the funding arithmetic before proposing any changes. Using stated assumptions - 6% portfolio return, 22% effective tax on retirement withdrawals, 4% initial withdrawal rate, 5% education inflation, 3% house-price inflation - what is the present value of the three goals versus the present value of their resources? What single number do you put in front of them?
Read the worked answer
State the assumptions, then let the arithmetic do the arguing.
| Goal | Future-dollar need | Date | PV at 6% |
|---|---|---|---|
| Retirement | $70,000 / (1 - 0.22) = $89,700 pre-tax; / 0.04 = $2,243,000 | age 62 | $1,252,000 |
| College, child 1 | $100,000 x 1.05^4 = $121,600 | yr 4 | $96,300 |
| College, child 2 | $100,000 x 1.05^7 = $140,700 | yr 7 | $93,600 |
| Lake house | $250,000 x 1.03^8 = $316,700 | yr 8 | $198,700 |
| Total | $1,641,000 |
Resources: $800,000 of investable assets (the $60,000 cash is already committed as a reserve) plus the present value of $24,000 a year for ten years at 6% ($176,600) = $976,600.
Gap: $664,000 of present value. Amortized over ten years at 6% (annuity factor 13.18) that is $50,300 a year of additional saving - a total savings rate near 40% of gross income.
The number to put on the table is not a probability of success. It is: "You currently have about 60 cents of capital for every dollar of the goals you have described." Funded ratio per goal, not a single Monte Carlo percentage, is the honest presentation - and it immediately makes the conversation about trade-offs rather than about portfolio returns.
2. Rank the three goals and defend a funding hierarchy, including which goal should carry the lowest probability of success and why. What must be fixed on the balance sheet before any of it?
Read the worked answer
Order of operations:
- Protect the plan first. The $60,000 reserve is about six months of spending - acceptable, but thin with two dependents and a $180,000 mortgage. Marcus carries $400,000 of term coverage against roughly $1.2 million of remaining human capital (ten years at $120,000). The gap is not an investment problem; it is a $700,000-$1,000,000, 15-year term policy and a disability review. Neither spouse has any long-term care coverage and there are roughly 25-30 years of exposure.
- Retirement next. It is the only goal that cannot be financed. There are loans for college and no loans for groceries. Failure is also irreversible: at 62 there is no second attempt.
- College third. It is the most financeable goal in the plan - student loans, the children's earnings, in-state alternatives, merit aid, cash flow during the college years. Funding at 70% and covering the rest with current income is a real plan.
- The lake house last. Purely discretionary, undated in any meaningful sense, and postponable without consequence.
Probability targets should differ by goal: retirement 85%, college 70%, lake house 50%. Applying one success threshold to all three either over-funds the boat or under-funds the retirement.
Do not prepay the 3.1% mortgage to 'reduce risk' - it is the cheapest leverage in the plan and the liquidity is worth more than the interest saved.
3. Elena says: 'Just take more risk - we have ten years.' How do you answer, and what three trade-offs do you put in writing?
Read the worked answer
Risk is not a funding source, and the arithmetic proves it.
Hold saving at $24,000 a year and solve for the return that funds $2,939,000 of future-dollar needs at age 62 (retirement $2,243,000 plus the college and house amounts compounded forward):
- 800,000 x (1+r)^10 + 24,000 x annuity factor = 2,939,000
- At 8%: $2,458,000. At 10%: $2,556,000+. Solving gives roughly 12% nominal.
A 12% required return implies an almost all-equity portfolio, held by a household that begins withdrawals in ten years - the worst possible combination of sequence risk and horizon. The 6% assumption already sits at the optimistic end of most capital market assumptions.
Three trade-offs, in writing, each quantified:
- Save more. An extra $50,000 a year for ten years closes the gap as stated. That is 40% of gross income and requires the $118,000 of spending to fall.
- Work longer. Retiring at 66 adds four years of contributions and growth and removes four years of withdrawals - roughly $700,000-$900,000 of the $1.19 million future-dollar gap.
- Give up a goal. The lake house is $317,000 in year eight, the equivalent of about $1,000 a month of additional saving for ten years. Halving it, or cutting retirement spending from $70,000 to $58,000 after tax (about $300,000 less capital needed), does the same work as chasing 12% returns - without the risk of failing at it.